What Home Mortgage Lenders Are Looking For
Buying a house requires careful consideration of one’s finances. Think of getting a mortgage as a financial checkup. Mortgage lenders want to make good home loans that meet standard underwriting criteria. We’re going to discuss specifically, what mortgage lenders are looking for in home loan applications so you can properly do your research an decide when to buy a house.
There’s 4′s C’s of lending that mortgage lenders are looking for in every home loan application.
- Credit-what does the credit score look like? The true definition of a credit score is that it is a representation of how likely you are to default on the debt obligation within the next 30 days. The higher the credit score the less likelihood of default, the lower the credit score the more likely a default will occur. Most mortgage lenders will still fund loans even if the credit score is as low as 620. The higher the credit score the better the interest rate. Mortgage lenders obtain tri-merge credit report where they get a credit score from each one of the credit bureaus; Trans Union, EquiFax & Experian. If you’re searching for a home loan and you have a credit scores of 800, 741 and 713 for example, the credit score used for the mortgage loan will be 741. It’s always the mid-credit score.
- Collateral-when buying a house, the mortgage lender wants to make sure the property they are making a loan against is free of health and safety hazards and the property is in livable condition. Home mortgage companies also want to make sure there is enough value in the property as determined by an appraisal report.
- Character-is there a history of delinquent monthly credit obligations? The lender wants to make sure you have the character to repay the debt and that you are a responsible individual. Character is huge because if the borrower has a history of not making their monthly obligations, the lender looks at the situation and thinks “how likely are they to not make the mortgage payment?” This goes in conjunction with credit score.
- Capacity-do you have the ability to take on the new house payment? How stable is your income and job history? Do you have the ability to make that mortgage payment for the next 30 years?
Here is the criteria home mortgage lenders are looking for in purchase loan applications.
Generally home mortgage lenders are looking at these smaller components of your home loan application:
- Two year job history at the same job or the same field.
- Job gaps what are they and what happened?
- Unemployment on tax returns? If yes is it a normal part of the job description?
- If there is instability with the job/employment can a letter of explanation be provided by the employer?
- Does the borrower have two years of federal income tax returns?
- If their federal income tax return extension has been filed is the borrower on some kind of repayment plan with IRS for taxes owed?
- Are there business losses on the tax return such as 2106 business expenses on a W-2 employee? How about losses on a federal corporate return?
- Does the borrower have enough assets in the bank for the down payment? If not could a gift be used? Can we paper trail that gift?
- If the borrowers had two years or more in one job and under two years and the other job the second job’s income cannot be used for qualifying.Which is it?
- Are there large cash deposits going into the bank account? If yes monies will need to be paper trailed even if not being used in the transaction.
- Does the loan scenario makes sense? If you already own a house will the new home purchase be as a new primary residence, second home or investment property? What’s going to make the most plausible sense?
For the majority of home loan applications, lenders want to make sure the overall file is going to make sense because that will provide the highest probability of obtaining a mortgage loan approval.
Lenders like to see a debt to income ratio of usually no more than 45% of the borrower’s gross monthly income. They also like to see credit scores of 700 or more, but under 700, and over 620 is still ok, file is more closely examined with scores under 700.
A good mortgage lender will also run your file for any compensating factors. Compensating factors are considered to be the golden goose of mortgage lending because they allow you to be short in one area while being really strong in another.
Following are typical compensating factors:
- larger down payment
- co-borrower or cosigner
- more income
- lower purchase price or lower loan amount
- credit scores above 740
For example: Lets day your credit score isn’t quite what you thought it would be and the middle credit score is 650. Turns out your credit card company posted a late to your credit report even though you made your payment on time, but as a result your credit score dropped, happens all the time. You’re buying a house for $200,000 and you’re putting down 3.5%, (3.5% on $200k is $7000) getting an FHA loan.Your lender will give you a better interest rate if your credit score was 700, but because of the low credit score and the minimum contribution of 3.5% your interest rate just went up to 4.65% from 4.25%. Upset you have a conversation with your lender and they can provide a compensating factor because you also have $20,000 saved up in the bank, way more than what is needed. So you agree to put down the full $20,000 reducing your loan to value from 97% to 90%. The lender will look at this as a compensating factor because you are taking on more risk, putting more of your cash into the transaction and they will reward you by giving you the interest rate of 4.25% despite your credit score dropping.
Such scenarios occur often time for borrowers who are trying to buy houses. It all boils down to making sure you have a great mortgage lender while being financially responsible. While you’re doing your initial research, you can now begin to figure out what lenders are going to look for in your financial package so you can speak to them on their terms and your loan can go through the pre-qualification process much more smoothly.